- Equity markets were down again this week amid steady Treasury yields, some mixed earnings reports and resilient economic data.
- The S&P 500 fell 2.5%, with telecom services lagging down more than 6%, while energy, banks and health care also fell sharply. Utilities were the lone sector to scratch out a positive performance on the week, but they are the worst performer this year. Meantime, the TSX was down 2.0% on the week, with technology and health care lagging, while utilities and telecom held firm.
- Both the S&P 500 and TSX have now slumped below their 200-day moving averages.
Bank of Canada
Last week, the Bank of Canada (BoC) held steady, declining to raise or lower interest rates. This was in line with expectations, but questions remain about what they’ll do at their next meeting in December. In their commentary, they continue to leave the door open to potential rate increases in case geopolitical tensions or other unanticipated events change the economic picture. In our opinion, however, they’re most likely done raising interest rates. We don’t think they’ll signal a rate cut at their next meeting, but rather a pause for the time being. If they choose to omit a comment saying that they’re still open to rate increases, that would be a strong signal that they intend to hold stead for a while. Geopolitical risks abound, and Canada has unfortunate debt levels that could deepen a recession—it’s likely that these factors will determine whether or not the BoC will be comfortable closing the door on further tightening.
Bottom Line: The BoC is likely done raising rates for now, but it’s unlikely that they will signal a rate cut in December.
Halloween is right around the corner, and appropriately, markets appear spooked; even with the consumer staying relatively strong, Big Tech seems to be in something of a dip. Last year, rising interest rates made valuations more expensive, which hurt Tech firms. This year, optimism over AI drove a resurgence—but as we know, rates continued to go up. Now that the early AI frenzy has subsided somewhat, investors are able to appreciate that multiples probably should have come down as rates increased this year. In the latest earnings announcements, we’ve also seen more conversations about consumer and business spending adjusting to shifting demand, as well as comments on declines in ad revenue—though it has been different from company by company. As an example, both Amazon and Microsoft surprised on the upside while Meta and Google did the opposite. With Apple and Nvidia up next, we could still see continuation of this volatility. These are signs that the economy is starting to feel some pain—it’s not necessarily bad, but it definitely is not as good as it was before. In the long run, however, these are still strong companies (valuations aside). We’ll continue to look at opportunities to jump in at a discount, and recent events may have set things up nicely for a potential Q4 2023 rally.
Bottom Line: Despite recent volatility, we believe that the big Tech firms are fundamentally strong, and we’ll consider opportunities to add to our position.
U.S. growth was strong in the most recent quarter. However, many are still estimating a shallow recession by the end of the year. So far, things have largely played out in line with our expectations. Consumers are supporting the economy; some analysts had expected this to taper, but we anticipated a resilient consumer. That said, the consumer is still weakening—there’s no debate on that anymore—and we do expect a shallow dip in Q4 of this year. Think of the two scenarios—a mild downturn and a harder recession—like two eggs. One egg is hard-boiled, while the other is fresh out of the carton. Cracks may emerge in both, but it’s only when they’re opened up that you’ll find out if the yolk is solid (like the hardboiled egg) or a total mess (like the raw egg). That’s the uncertainty we’re dealing with at present, and despite some fracturing, we still think the underlying economy is relatively hardboiled. In Canada, we’re a bit more nervous, as higher interest rates and consumer debt levels mean that a short, one-to-two-quarter recession is unlikely, especially with impacts on the housing market likely to play out over the course of years. Even in the case of a longer recession in Canada, however, we don’t expect it to be particularly severe.
Bottom Line: We’re still expecting a shallow recession in Q4, with the downturn likely to be longer in Canada than in the United States.
Recent developments have justified our view that while we don’t necessarily need to be massively reducing equities in our portfolios, we do benefit from having some defensive plugs. Our Gold position is a good example: it’s doing exactly what it should be doing in this market.
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled An Economy at a Crossroads.
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